If you own a family business, it likely dominates both your time and your family's assets. When business owners get divorced, dividing the family business often takes center stage. Understanding how the Court will treat your business is essential to making the right choices throughout the divorce process.

Yes, Your Family Business is (Probably) a Marital Asset

As a small business owner, you are likely proud of the work you put into your business. But all that hard work sometimes comes at a cost. For some families, uncertain incomes, long hours, and pressure to perform can break down the marriage relationship leading to divorce. When that happens, you probably will want to keep what they have created. But your spouse may have a claim as well.

Separate vs Marital Property

One of the first questions the court must answer in dividing the family business is whether it is separate property or marital property. A person's ownership interest in a family business may qualify as separate property if it was:

• Owned prior to the marriage
• Received as an inheritance
• Given as a gift
• Listed in a valid prenuptial agreement

However, it must be kept separate from all other marital assets. Even then, if the spouse is an active participant in the business, it will likely be considered part of the marital estate.

If you started, worked in, or contributed to your family business between the date of the marriage and the date of the divorce, it will likely be considered a marital asset to be divided in divorce. Anything accrued by either party during the marriage is subject to division, including employment income and benefits. Your spouse will likely have a claim to part of the company's value based on your work for the company during the marriage, and your spouse's contributions to other parts of your marriage, including homemaking or childcare during that time.

What is Your Business Interest Worth?

Next, the courts will need to determine what that martial portion of the family business is worth. Business owners often have a very clear picture of the inventory, equipment, accounts receivable, and general business income related to their company. But they often vastly over- or under-estimate other intangible aspects of their business's value, such as:

• Intellectual property (patents, trademarks, etc.)
• Brand recognition
• Customer lists
• Goodwill
• Appreciation or depreciation of assets including company real estate

Determining the total net worth of a business is complicated. Often, it will take hiring a business valuation expert to establish the company's value. This number may be reduced if the business had a premarital value, you are less than a full owner, or your authority over company decisions is limited. Your expert witness can account for these adjustments and provide the court a reasonable value for the marital portion belonging to either spouse.  

The Double Dip: Business Assets as Income

Many business owners keep liquid funds in their business or receive company perks like vehicles, phones, or internet. However, when calculating child support and spousal support, the Courts are allowed to add those funds back in. Be aware of the risk of double dipping. If the same funds are used to establish the value of the business and as income for the business-owner spouse, it could result in the business owner to paying more than they can afford or limiting the cash available for future business investments.

Dividing the Family Business in Divorce

Once the business's value is established, the Court can finally divide the family business between the parties. The goal is for the Court to award each party a fair and equitable portion of the marital estate as a whole. Not every asset needs to be divided, and the number does not have to be exactly equal, but generally anything too far from a 50/50 split (congruence) will need to be explained. Dividing the family business may involve:

Buying Out the Other Spouse's Interest

The judgement may require one spouse to buy out the other spouse's interest in the company. This may be done by offsetting the value using other assets (like the marital home or retirement accounts), or by taking out a loan. Once the buyout is paid, the non-owner spouse will have complete ownership of the business or its shares.

Divided Distributions

If there aren't enough liquid assets for a complete buyout, the court could order one spouse to continue to operate the business and pay the other spouse a share of the net proceeds as distributions over time. However, this option has significant risk for the non-owner spouse, since he or she will have no control over the business, its income, or its management. A receiver may be needed to oversee the financial management of the business until the distributions are complete.

Selling the Business

Another common option judges use for dividing the family business is simply to have it sold and the proceeds divided between the parties. This offers a clean break and possible profits, but the loss of ownership can have a strong negative impact on the parties. In addition, finding the right buyer for a commercial entity can be long, complicated, and time consuming.

Co-Ownership of the Business

If you and your spouse operated a “mom-and-pop” style business, you may both have an interest in seeing it flourish, even after the marriage is over. You and your spouse could agree to continue to own and operate the business together after the divorce. This may involve restructuring so each spouse takes on a portion of the work or dividing ownership shares. However, success depends on you and your spouse maintaining a good working relationship, which can be difficult when conflict is high.

Closely Held Businesses and Mandatory Buy Back Clauses

In deciding how to divide the family business, pay special attention to ownership agreements that control the company. Many closely held businesses are designed to protect shareholders' control over the company. If a judgment or order awards a share of the business to a third party (including your spouse), it could trigger a mandatory buy back clause, preventing the transfer. Any such clauses should be brought to the Court's attention to avoid creating an accidental forfeiture.

Get a Fair Division of Family Business Interests With the Help of a Michigan Family Lawyer

At Bebout, Potere, Cox & Bennion, P.C., we care about you and your family. We help individuals and families in Rochester Hills, Rochester, Troy, Lake Orion, Oxford, Oakland County, Macomb County and throughout Southeast Michigan. We can help identify, value, and divide family business assets, negotiating or advocating for a fair and equitable property division you can live with. Call us at 248-651-4114 or contact us here to speak to an attorney.